Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the Company is a larger accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the common equity held by non-affiliates of the Registrant (assuming for this purpose, but without conceding, that all executive officers and Directors are “affiliates” of the Registrant) as of December 31, 2019, the last day of business day of the Registrant’s most recently completed second fiscal quarter was $9,036,888 based on $0.115 per share price.
The number of shares of outstanding of the Registrant’s Common Stock as of September 24, 2020 was 82,082,800
PART 1
ITEM 1. BUSINESS
Forward Looking Statements
This annual report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions.
While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested in this report. Except as required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
As used in this annual report, the terms “we”, “us” and “our” mean Leafbuyer Technologies, Inc., unless otherwise indicated.
Business Overview
Leafbuyer.com Platform
The Company’s wholly owned subsidiary, LB Media Group, LLC has evolved and grown as a listing website to a comprehensive marketing technology platform that focuses on new customer acquisition, retention and now online-order ahead services. With the increased popularity of Leafbuyer texting/loyalty program, clients can communicate through SMS and MMS messaging to inform consumers of specials as well as confirm online ordering details. This creates more diverse product offering for our clients.Leafbuyer proprietary systems are integrated to form a seamless process for the user to find, research, compare and communicate on the thousands of products available.The Company’s website, Leafbuyer.com, and its progressive web application hosts a robust search algorithm similar to popular travel or hotel sites, where consumers can search the database for appealing offers. They can also search through thousands of menu items and products, create a profile, sign up to receive deal alerts and place online orders for pick up or delivery.With a worldwide pandemic from Covid-19, the need for an order ahead solution in the cannabis industry was put to the test in early March of 2020. Technology enhancements were made that now include delivery features for medical and recreational stores, increased POS integrations and real-time notifications.
The Leafbuyer Network reaches millions of consumers every month through its web-based platforms, loyalty platform and partner sites. The site’s sophisticated vendor dashboard pairs vendor data with consumer needs and presents a robust, 24/7 real-time dashboard where vendors can update menus, specials, available jobs, and more. The system helps to track the vendors’ return on investment.
The Company continues an aggressive push into all legal cannabis markets. Increasing the Company’s marketing and sales presence in new markets is a primary objective. Along with this expansion, the Company continues to develop new technologies that will serve cannabis dispensaries and product companies in attracting and retaining consumers.
Leafbuyer operates in a rapidly evolving and highly regulated industry that, as has been estimated by grandviewresearch.com, to exceed $73 billion in revenue by the year 2027. The founders and board of directors have been, and will continue to be, aggressive in pursuing long-term opportunities.
We will be announcing a major addition to our platform shortly that will allow an “all in one” platform that is completely customizable for our clients.This will tie all Leafbuyer products into one device that will give our customers the ability to control messaging through multiple avenues and receive real-time updates. This will give the consumers the ability to search, shop, earn rewards, place orders and communicate with their favorite stores all in one place.
COVID -19 and Worldwide Pandemic Outlook
The Company was affected in March by the COVID-19 outbreak and worldwide pandemic. The Company saw some postponements in orders in the first few weeks March 2020 but by the end of March 2020 orders stabilized to a normal level. The Company has made a significant pivot to have the complete solution when it comes to online ordering and communication.
The Team
The Company has 29 full-time employees working out of its headquarters in Greenwood Village, Colorado. In addition, the Company currently has sales teams in California and Oklahoma. Leafbuyer also has relationships with numerous contractors which it retains from time to time.
A majority of our employees are involved in sales and customer service.
One of the Company’s top priorities in 2020 has been recruiting and retaining some of the top talent in the cannabis and technology industries.
Growth State by State
As new states continue to legalize and the market expands, so does Leafbuyer.As of September 2020, Leafbuyer now works with clients in 24 legal states including California, Colorado, Washington, Oklahoma, Oregon, and Michigan and we are continuing our efforts to expand into all legal markets.Our primary focus are markets that have the most potential and that are continuing to expand and show stability.
The marginal cost for Leafbuyer to enter a market is minimal in comparison to growers or retail operations. In order for us to enter a new market, most of our costs include sales and marketing personnel and grassroots efforts to grow the consumer base in the new market. With the changing times of Covid-19, virtual meetings have doubled and are more accepted reducing the cost of travel and office space into smaller markets.
We have formed many partnerships in the industry with Point of Sale and other ancillary companies to expand our referral and VAR programs.This gives Leafbuyer more access to new potential customers in smaller markets at a very minimal cost.We will continue to expand this program as a complementary resource for expansion into other markets.
2020 and Beyond
The global legal marijuana market size is expected to reach $66.3 billion by the end of 2025, according to a new report by Grand View Research, Inc. It is anticipated to expand at a compound annual growth rate of 23.9% during the forecast period. Increasing legalization of marijuana for medicinal and recreational purposes is expected to continue.
Our business model is designed to benefit from this trend. When a new state passes a medical or recreational cannabis law, we can start marketing to consumers and businesses in that state with minimal marginal cost. Because Leafbuyer is not involved in the production or sale of cannabis, we do not have to build expensive grow operations and open brick and mortar stores. As more states pass laws to offer legal cannabis products, we begin marketing into the state and sign up dispensaries to be on the Leafbuyer platform.
The Company also plans to accelerate growth in our loyalty platform. The loyalty product line ties into other Company offerings to complement and provide a truly unique value proposition. Loyalty is monetized through a monthly fee and a cost per text model. The Company anticipates a significant opportunity to increase revenue by expanding this product offering.
We plan to grow the Company organically through the aggressive deployment of sales and marketing resources into legal cannabis states. We understand that to obtain significant market share in the industry in the future will require us to look for acquisitions for a significant portion of that growth. However, there can be no assurance that we will be able to locate and acquire such opportunities or that they will be on terms that are favorable to the Company.
ITEM 1A. RISK FACTORS
Risks Related to the Business
We have minimal financial resources. Our Company Financial Statements includes a footnote disclosure stating that there is substantial doubt about our ability to continue as a going concern.
Leafbuyer Technologies, Inc. is an early stage Company and has minimal financial resources. We had a cash balance of $1,309,912 as of June 30, 2020. We had an accumulated deficit of $15,839,678 at June 30, 2020. We may seek additional financing. The financing sought may be in the form of equity or debt financing from various sources as yet unidentified. No assurances can be given that we will generate sufficient revenue or obtain the necessary financing to continue as a going concern.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Leafbuyer is and will continue to be completely dependent on the services of our president, chief executive officer and chief financial officer, the loss of whose services may cause our business operations to cease, and we will need to engage and retain qualified employees and consultants to further implement our strategy.
Leafbuyer’s operations and business strategy are completely dependent upon the knowledge and business connections of Messrs. Rossner and Breen our executive officers. They are under no contractual obligation to remain employed by us. If any should choose to leave us for any reason or become ill and unable to work for an extended period of time before we have hired additional personnel, our operations will likely fail. Even if we are able to find additional personnel, it is uncertain whether we could find someone who could develop our business along the lines described in this Form 10-K. We will likely fail without the services of our officers or an appropriate replacement(s).
COVID -19 and Worldwide Pandemic Outlook
The Company was affected in March by the COVID-19 outbreak and worldwide pandemic. The Company saw some postponements in orders in the first few weeks of the month but later in the month orders stabilized to a normal level. We anticipate that some of these postponed orders will be placed in the following quarters. The Company has made a significant pivot to online ordering and curbside pickup with technology that had already been built out. The Company believes the pivot to these new areas will enhance future revenue opportunities with minimal additional cost.
Because we have only recently commenced business operations, we face a high risk of business failure.
The Company was formed in April 2013. Our efforts to date have related to developing our business plan and beginning business activities. We face a high risk of business failure. The likelihood of the success of the Company must be considered in light of the expenses, complications and delays frequently encountered in connection with the establishment and expansion of new businesses and the competitive environment in which the Company will operate. There can be no assurance that future revenues will occur or be significant enough or that we will be able to sell our products and services at a profit, if at all. Future revenues and/or profits, if any, will depend on many various factors, including, but not limited to both initial and continued market acceptance of the Company’s website and the successful implementation of its planned growth strategy.
We may not be successful in hiring technical personnel because of the competitive market for qualified technical people.
The Company’s future success depends largely on its ability to attract, hire, train and retain highly qualified technical personnel to provide the Company’s services. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining the technical personnel it requires to conduct and expand its operations successfully and to differentiate itself from its competition. The Company’s results of operations and growth prospects could be materially adversely affected if the Company were unable to attract, hire, train and retain such qualified technical personnel.
We will face competition from companies with significantly greater resources and name recognition.
The markets in which the Company will operate are characterized by intense competition from several types of solution and technical service providers. The Company expects to face further competition from new market entrants and possible alliances among competitors in the future as the convergence of information processing and telecommunications continues. Many of the Company’s current and potential competitors have significantly greater financial, technical, marketing and other resources than the Company. As a result, they may be better able to respond or adapt to new or emerging technologies and changes in client requirements or to devote greater resources to the development, marketing and sales of their services than the Company. There can be no assurance that the Company will be able to compete successfully. In addition, the Company will be faced with numerous competitors, both strategic and financial, in attempting to obtain competitive products. Many actual and potential competitors we believe are part of much larger companies with substantially greater financial, marketing and other resources than the Company, and there can be no assurance that the Company will be able to compete effectively against any of its future competitors.
To fully develop our business plan, we will need additional financing.
We will have to obtain additional financing in order to conduct our business in a manner consistent with our proposed operations. There is no guaranty that additional funds will be available when, and if, needed. If we are unable to obtain financing, or if its terms are too costly, we may be forced to curtail expansion of operations until such time as alternative financing may be arranged, which could have a materially adverse impact on our operations and our shareholders’ investment.
Risks Related to Our Securities
Our officers and directors currently own the majority of our voting power, and through this ownership, control our Company and our corporate actions.
Our current Board of Directors and executive officers hold approximately 26.7% of the voting power of the Company’s outstanding voting capital stock as of June 30, 2020. These parties have a controlling influence in determining the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all our assets, election of directors, and other significant corporate actions. As such, these shareholders have the power to prevent or cause a change in control; therefore, without the aforementioned consent we could be prevented from entering into transactions that could be beneficial to us. The interests of our executive officers may give rise to a conflict of interest with the Company and the Company’s shareholders.
There is a substantial lack of liquidity of our common stock and volatility risks.
Our common stock is quoted on the OTC Markets platform under the symbol “LBUY.” The liquidity of our common stock may be very limited and affected by our limited trading market. The OTC Markets quotation platform is an inter-dealer market much less regulated than the major exchanges, and is subject to abuses, volatilities and shorting. There is currently no broadly followed and established trading market for our common stock. An established trading market may never develop or be maintained. Active trading markets generally result in lower price volatility and more efficient execution of buy and sell orders. Absence of an active trading market reduces the liquidity of the shares traded.
The trading volume of our common stock may be limited and sporadic. This situation is attributable to a number of factors, including the fact that we are a small Company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven Company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that current trading levels will be sustained. As a result of such trading activity, the quoted price for our common stock on the OTC Markets may not necessarily be a reliable indicator of our fair market value. In addition, if our shares of common stock cease to be quoted, holders would find it more difficult to dispose of or to obtain accurate quotation as to the market value of, our common stock and as a result, the market value of our common stock likely would decline.
The market price for our stock may be volatile and subject to fluctuations in response to factors, including the following:
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the increased concentration of the ownership of our shares by a limited number of affiliated stockholders following the share exchange may limit interest in our securities;
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variations in quarterly operating results from the expectations of securities analysts or investors;
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revisions in securities analysts’ estimates or reductions in security analysts’ coverage;
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announcements of new products or services by us or our competitors;
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reductions in the market share of our products and services;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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general technological, market or economic trends;
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investor perception of our industry or prospects;
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insider selling or buying;
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investors entering into short sale contracts;
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regulatory developments affecting our industry; and
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additions or departures of key personnel.
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Many of these factors are beyond our control and may decrease the market price of our common stock, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common stock will be at any time, including as to whether our common stock will sustain current market prices, or as to what effect that the sale of shares or the availability of common stock for sale at any time will have on the prevailing market price.
Our common stock may never be listed on a major stock exchange.
We currently do not satisfy the initial listing standards and cannot ensure that we will be able to satisfy such listing standards or that our common stock will be accepted for listing on any such exchange. Should we fail to satisfy the initial listing standards of such exchanges, or our common stock is otherwise rejected for listing, the trading price of our common stock could suffer, the trading market for our common stock may be less liquid, and our common stock price may be subject to increased volatility.
A decline in the price of our common stock could affect our ability to raise working capital and adversely impact our ability to continue operations.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. A decline in the price of our common stock could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new services and continue our current operations. If our common stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
Concentrated ownership of our common stock creates a risk of sudden changes in our common stock price.
The sale by any shareholder of a significant portion of their holdings could have a material adverse effect on the market price of our common stock.
Sales of our currently issued and outstanding stock may become freely tradable pursuant to Rule 144 and may dilute the market for your shares and have a depressive effect on the price of the shares of our common stock.
A number of the outstanding shares of common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”) (“Rule 144”). As restricted shares, these shares may be resold only pursuant to an effective registration statement or under the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that a non-affiliate who has held restricted securities for a period of at least six months may sell their shares of common stock. Under Rule 144, affiliates who have held restricted securities for a period of at least six months may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed the greater of 1% of a Company’s outstanding shares of common stock or the average weekly trading volume during the four calendar weeks prior to the sale (the four calendar week rule does not apply to companies quoted on the OTC Markets). A sale under Rule 144 or under any other exemption from the Securities Act, if available, or pursuant to subsequent registrations of our shares of common stock, may have a depressive effect upon the price of our shares of common stock in any active market that may develop.
If we issue additional shares or derivative securities in the future, it will result in the dilution of our existing stockholders.
Our Articles of Incorporation authorize the issuance of up to 150,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares are designated as “blank check” preferred stock, par value $0.001 per share (the “Preferred Stock”). Our board of directors may choose to issue some or all of such shares, or derivative securities to purchase some or all of such shares, to provide additional financing in the future.
We do not plan to declare or pay any dividends to our stockholders in the near future.
We have not declared any dividends in the past, and we do not intend to distribute dividends in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.
The requirements of being a public company may strain our resources and distract management.
As a result of filing the resignation statement, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). These requirements are extensive. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting.
We may incur significant costs associated with our public company reporting requirements and costs associated with applicable corporate governance requirements. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly. This may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
Persons associated with securities offerings, including consultants, may be deemed to be broker dealers.
In the event that any of our securities are offered without engaging a registered broker-dealer, we may face claims for rescission and other remedies. If any claims or actions were to be brought against us relating to our lack of compliance with the broker-dealer requirements, we could be subject to penalties, required to pay fines, make damages payments or settlement payments, or repurchase such securities. In addition, any claims or actions could force us to expend significant financial resources to defend our Company, could divert the attention of our management from our core business and could harm our reputation.
Future changes in financial accounting standards or practices may cause adverse unexpected financial reporting fluctuations and affect reported results of operations.
A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct business.
“Penny Stock” rules may make buying or selling our common stock difficult.
Trading in our common stock is subject to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer that recommends our common stock to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market price and liquidity of our common stock.
Our ability to issue preferred stock may adversely affect the rights of holders of our Common Stock and may make takeovers more difficult, possibly preventing you from obtaining the optimal price for our Common Stock.
Our Articles of Incorporation authorizes the issuance of shares of “blank check” preferred stock, which would have the designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Common Shares. The issuance of preferred stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company.
TEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive office is located at 6888 S. Clinton Street, Suite 300, Greenwood Village, CO 80112. The Company also leases space at 5200 West Century Blvd., Los Angeles, CA 90045.
ITEM 3. LEGAL PROCEEDINGS
We are not aware of any legal proceedings to which we are a party or of which our property is the subject. None of our directors, officers, affiliates, any owner of record or beneficially of more than 5% of our voting securities, or any associate of any such director, officer, affiliate or security holder are (i) a party adverse to us in any legal proceedings, or (ii) have a material interest adverse to us in any legal proceedings. We are not aware of any other legal proceedings that have been threatened against us.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is quoted on the OTC Markets under the trading symbol “LBUY”. Trading in stocks quoted on the OTC Markets is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects. We cannot assure you that there will be a market for our common stock in the future. Our common stock commenced trading on April 5, 2017 under the symbol “APVT”.
The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
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Year ended June 30, 2020
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High
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Low
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Quarter ended June 30, 2020
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$
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0.10
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$
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0.07
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Quarter ended March 31, 2020
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$
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0.15
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$
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0.06
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Quarter ended December 31, 2019
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$
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0.23
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$
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0.08
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Quarter ended September 30, 2019
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$
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0.80
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$
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0.11
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Year ended June 30, 2019
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High
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Low
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Quarter ended June 30, 2019
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$
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1.28
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$
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0.74
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Quarter ended March 31, 2019
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$
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1.73
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$
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0.44
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Quarter ended December 31, 2018
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$
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2.33
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$
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0.43
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Quarter ended September 30, 2018
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$
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2.40
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$
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0.55
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Holders
As of June 30, 2020, there were approximately 15,000 holders of record of our common stock.
Dividends
We have not paid cash dividends on shares of our common stock and we do not expect to declare or pay dividends on shares of our common stock for the foreseeable future. We intend to retain earnings, if any, to finance the development and expansion of our business. Our future dividend policy will be subject to the discretion of our Board of Directors and will depend upon our future earnings, if any, our financial condition, our capital requirements, general business conditions and other factors.
Equity Compensation Plans
The equity incentive plan of the Company was established in February of 2017. The Board of Directors of the Company may from time to time, in its discretion grant to directors, officers, consultants and employees of the Company, non-transferable options to purchase common shares, provided that the number of options issued do not exceed 20,000,000. The options are exercisable for a period of up to 10 years from the date of the grant. The number of shares authorized to be issued under the equity incentive plan was increased from 10,000,000 to 20,000,000 through a consent of stockholders to amend and restate the equity incentive plan.
Recent Sales of Unregistered Securities
On July 2, 2019, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to issue and sell directly to the Investors in a private offering (the “Offering”), an aggregate of 7,211,538 shares of common stock (the “Shares”), par value $0.001 per share, at $0.624 per Share or a 20% discount to the closing price as of July 2, 2019, for gross proceeds of approximately $4,500,000 before deducting offering expenses. The Shares were offered by the Company pursuant to the exemption provided in Section 4(a)(2) under the Securities Act, and Rule 506(b) promulgated thereunder. The Company was obligated in accordance with the terms of a Registration Rights Agreement (the “Rights Agreement”) to register the Shares and the shares of common stock underlying the warrants described below, within 90 days from the date of the Purchase Agreement. All shares of the common stock and shares of common stock underlying the warrants have been registered.
As additional consideration for the purchase of the Shares, the Company agreed to issue to the Investors Series A Warrants, Series B Warrants, and Series C Warrants (collectively, the “Warrants”). The number of shares for the Warrants and exercise price of the Warrants is subject to adjustment; provided, however, on each of (i) the 3rd Trading Day following the effective date (the “Effective Date”) of the Registration Statement to be filed by the Company (the “Interim True-Up Date”), and (ii) the 6th Trading Day following the Effective Date (the “Final True-Up Date”), the Exercise Price shall be reduced, and only reduced, to equal the lower of (1) the then Exercise Price and (2) 100% of the lowest VWAP during the 2 Trading Days prior to the Interim True-Up Date or 5 Trading Days prior to the Final True-Up Date, as applicable, immediately following the Effective Date. The Series C Warrants, which are considered pre-funded, allow each Investor to purchase an amount of shares equal to the sum of (a) any shares purchased by the Investor pursuant to the Purchase Agreement that would have resulted in the beneficial ownership of greater than 4.99% of the outstanding common shares of the Company, (b) on the 3rd Trading Day following the Effective Date, if 80% of the lowest VWAP during the 2 Trading Days immediately prior to such date (“Primary Effective Date Price”) is less than $0.624, then a number of shares of Common Stock equal to such Investor’s Purchase Agreement purchase amount divided by the Primary Effective Date Price less any shares of Common Stock (i) issued at the Closing and (ii) issuable pursuant to clause (a) above, if any, and (c) on the 6th Trading Day following the Effective Date, if 80% of the lowest VWAP during the 5 Trading Days immediately prior to such date (“Secondary Effective Date Price”) is less than $0.624, then a number of shares of Common Stock equal to such Holder’s Subscription Amount at the Closing divided by the Secondary Effective Date Price less any shares of common stock (i) issued at the Closing, (ii) issuable pursuant to clause (a) above, if any, (ii) issuable pursuant to clause (b) above, if any. The Series C Warrants are exercisable at a price of $0.001 per share.
The Company issued 30,299,998 shares of common stock pursuant to the Purchase Agreement, as well as the exercise of the Series C Warrants and fees paid in shares of common stock. The Company received approximately $4,038,000, net of the placement fees, legal and other expenses incurred for the placement of the share. The investors received Series A Warrants to allow the Investors to purchase an aggregate of 7,018,091 shares of common stock, and Series B Warrants to allow the Investors to purchase an aggregate of 28,072,364 shares of common stock at a purchase price of $0.1603 per common share. If the investors choose to exercise all Series A and Series B Warrants, the Company would receive proceeds of $5,625,000.
The Company relied on the exemptions from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 promulgated thereunder. The subscription agreements with the investors contained representations to support the Company’s reasonable belief that the investors had access to information concerning the Company’s operations and financial condition, the investors acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the investors are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the sale of securities did not involve a public offering; the Company made no solicitation in connection with the sale other than communications with the investors; the Company obtained representations from the investors regarding their investment intent, experience and sophistication; and the investors either received or had access to adequate information about the Company in order to make an informed investment decision.
Item 6. Selected Financial Data
We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this annual report. The discussions of results, causes and trends should not be construed to imply any conclusion that these results or trends will necessarily continue into the future.
The Company was formed as AP Event, Inc., (“Registrant”) a Nevada corporation on October 16, 2014. The Registrant was originally in the business of travel agency to provide individual and group leisure tours to music festivals, and concerts combined with local excursions. On March 21, 2017 LB Media Group, LLC (“LB Media”) acquired eighty percent (80%) of the outstanding common stock of the Registrant. On March 23, 2017, the Registrant consummated an Agreement and Plan Merger (“Merger”) with LB Media and LB Acquisition Corp., a wholly owned subsidiary of the Registrant, whereby LB Acquisition was merged with and into LB Media Group, LLC. Simultaneously with the Merger, the Registrant accepted subscriptions in a private placement offering (“Offering”) of its Common Stock. As a result of the Merger, LB Media became a wholly owned subsidiary of the Registrant and following the consummation of the Merger and giving effect to the securities sold in the Offering, the members of LB Media beneficially own approximately fifty-five percent (55%) of the issued and outstanding Common Stock of the Registrant.
On March 24, 2017, the Registrant amended its Articles of Incorporation (the “Amendment”) to (i) change its name to LeafBuyer Technologies, Inc., (ii) to increase the number of its authorized shares of capital stock from 75,000,000 to 160,000,000 shares of which 150,000,000 shares were designated common stock, par value $0.001 per share (the “Common Stock”) and 10,000,000 shares were designated “blank check” preferred stock, par value $0.001 per share (the “Preferred Stock”) and (iii) to effect a forward split such that 9.25 shares of Common Stock were issued for every 1 share of Common Stock issued and outstanding immediately prior to the Amendment (the “Split”).
On April 19, 2018, the Company entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA II PN Ltd. (“Investor”), a Cayman Island exempt limited partnership and an affiliate of Yorkville Advisors Global, LLC, whereby the Company sold and the Investor purchased 869,565 shares of the Company’s common stock for One Million Dollars ($1,000,000), Additionally, under the SEDA the Company may sell to the Investor up to $5 million of shares of Common Stock over a two-year commitment period. Under the terms of the SEDA, the Company may from time to time, in its discretion, sell newly issued shares of its common stock to the Investor at a discount to market of 8% of the lowest daily volume weighted average price during the relevant pricing period. The Company is obligated to registered the Initial Shares, the Commitment Shares (as defined below), and the shares of Common Stock issuable under the SEDA pursuant to a registration statement under the Securities Act of 1933, as amended (the Securities Act”).
During October and November 2018, the Company used the SEDA to receive $1,045,000. The Company issued 1,116,738 common shares which were valued at fair market at the date issued.
On November 6, 2018, the Company acquired a customer facing software (“Loyalty Software”) through a Stock Purchase Agreement, where the Company acquired all the issued and outstanding capital stock of Greenlight Technologies, Inc. (“GTI”) from its shareholders. At the time of the transaction, there were no employees working for GTI, no systems and no assets, other than the Loyalty Software. GTI’s legal entity will be dissolved in the transition and the Loyalty Software will be assumed by the Company. Management determined that the purchase of GTI did not constitute a business purchase and recorded the transaction as a purchase of software. The consideration for the Loyalty Software was 2,916,667 shares of common stock, par value $0.001 per share and cash of approximately $450,000. Total value of the Loyalty Software was estimated at approximately $3,010,000. During the year ended June 30, 2020 additional Incentive Shares of 366,667 for a value of $262,500 was issued to shareholders of GTI as final settlement of the Purchase Agreement.
On July 2, 2019, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to issue and sell directly to the Investors in a private offering (the “Offering”), an aggregate of 7,211,538 shares of common stock (the “Shares”), par value $0.001 per share, at $0.624 per Share or a 20% discount to the closing price as of July 2, 2019, for gross proceeds of approximately $4,500,000 before deducting offering expenses. The Purchase Agreement contains customary representations and warranties, and the Offering was subject to customary closing conditions. The Shares were offered by the Company pursuant to the exemption provided in Section 4(a)(2) under the Securities Act, and Rule 506(b) promulgated thereunder. The Company was obligated in accordance with the terms of a Registration Rights Agreement (the “Rights Agreement”) to register the Shares and the shares of common stock underlying the warrants described below, within 90 days from the date of the Purchase Agreement.
The Company issued 30,299,998 shares of common stock for the private placement and the issuance of Series C Warrants. The Company received approximately $4,060,000, net of the placement fees, legal and other expenses incurred for the placement of the share. The investors received Series A Warrants to allow the Investors to purchase an aggregate of 7,018,091 shares of common stock, and Series B Warrants to allow the Investors to purchase an aggregate of 28,072,364 shares of common stock at a purchase price of $0.1603 per common share.
The equity incentive plan of the Company dated February of 2017 was amended and restated by The Board of Directors of the Company in April 2020 to increase the number of options available from 10,000,000 to 20,000,000.
Business Overview
Leafbuyer.com Platform
The Company’s wholly owned subsidiary, LB Media Group, LLC has evolved and grown as a listing website to a comprehensive marketing technology platform that focuses on new customer acquisition, retention and now online-order ahead services. With the increased popularity of Leafbuyers texting/loyalty program, clients can communicate through SMS and MMS messaging to inform consumers of specials as well as confirm online ordering details. This creates more diverse product offering for our clients. Leafbuyers proprietary systems are integrated to form a seamless process for the user to find, research, compare and communicate on the thousands of products available.The Company’s website, Leafbuyer.com, and its progressive web application hosts a robust search algorithm similar to popular travel or hotel sites, where consumers can search the database for appealing offers. They can also search through thousands of menu items and products, create a profile, sign up to receive deal alerts and place online orders for pick up or delivery.With a worldwide pandemic from Covid-19, the need for an order ahead solution in the cannabis industry was put to the test in early March of 2020. Technology enhancements were made that now include delivery features for Medical and Recreational stores, increased POS integrations and real-time notifications.
The Leafbuyer Network reaches millions of consumers every month through its web-based platforms, loyalty platform and partner sites. The site’s sophisticated vendor dashboard pairs vendor data with consumer needs and presents a robust, 24/7 real-time dashboard where vendors can update menus, specials, available jobs, and more. The system helps to track the vendors’ return on investment.
The Company continues an aggressive push into all legal cannabis markets. Increasing the company’s marketing and sales presence in new markets is a primary objective. Along with this expansion, the Company continues to develop new technologies that will serve cannabis dispensaries and product companies in attracting and retaining consumers.
Leafbuyer operates in a rapidly evolving and highly regulated industry that, as has been estimated by grandviewresearch.com, to exceed $73 billion in revenue by the year 2027. The founders and board of directors has been, and will continue to be, aggressive in pursuing long-term opportunities.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Results of Operations for the years ended June 30, 2020 versus June 30, 2019
The following table summarizes the results of operations for the years ended June 30, 2020 and 2019:
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,528,356
|
|
|
$
|
1,789,823
|
|
|
Cost of revenue
|
|
|
1,767,855
|
|
|
|
1,289,583
|
|
|
Gross profit
|
|
|
760,501
|
|
|
|
500,240
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
842,736
|
|
|
|
1,249,539
|
|
|
General and administrative
|
|
|
4,409,769
|
|
|
|
5,124,824
|
|
|
Total operating expenses
|
|
|
5,252,505
|
|
|
|
6,374,363
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,492,004
|
)
|
|
|
(5,874,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,017,244
|
)
|
|
|
(679,543
|
)
|
|
Net loss
|
|
$
|
(5,509,248
|
)
|
|
$
|
(6,553,666
|
)
|
Revenues
During the year ended June 30, 2020, we generated $2,528,356 of revenues, compared to revenues of $1,789,823 during the year ended June 30, 2019. The increase of $738,533 or 41% was primarily due to recent expansion of our platform that enables us to sell more to a single customer, increasing our per customer revenue and the initial expansion of our services into additional states. Our market penetration is still below 25% in Colorado and less than 1% in other states. Management expects to have continued high quarter over quarter revenue growth as we expand our platform and our geographical service area.
Gross profit increased to $760,501 for the period ended June 30, 2020 which was an increase of $260,261 or 52% over the same period last year of June 30, 2019. Gross profit as a percentage of revenue increased from 28% to 30% for the period ended June 30, 2020 over June 30, 2019.
The overall focus of the Company is to continue to grow revenue while expanding the geographic footprint of operations. We will continue to broaden the Leafbuyer technology platform to increase the opportunity for customer value creation and upsell of our product line. Anticipated growth will come from both organic sources and acquisitions. The Company is constantly looking for acquisitions to complement the current platform and expand geographic reach.
Expenses
During the year ended June 30, 2020, we incurred total operating expenses of $5,252,505, including $4,409,769 in general and administrative expenses, and $842,736 in selling expenses. During the year ended June 30, 2019, we incurred total operating expenses of $6,374,363, including $5,124,824 in general and administrative expenses, and $1,249,539 in selling expenses The decrease of $1,121,858 or 18% was primarily due less stock compensation expense. Management expects the general and administrative expenses to continue to decrease as management focuses on getting current operations to positive cash flow.
Net Loss
During the year ended June 30, 2020 we incurred a net loss of $5,509,248, compared to a net loss of $6,553,666 for the year ended June 30, 2019.
Liquidity and Capital Resources
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months from the date of the issuance of these unaudited condensed consolidated financial statements with existing cash on hand and/or the private placement of common stock or obtaining debt financing. There is, however, no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months.
At June 30, 2020 we had $1,309,912 in cash and cash equivalents.
Cash Flows
Our cash flows from operating, investing and financing activities were as follows:
|
|
|
Year Ended June 30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Net cash used in operating activities
|
|
$
|
(2,808,559
|
)
|
|
$
|
(2,888,580
|
)
|
|
Net cash used in investing activities
|
|
$
|
(559,667
|
)
|
|
$
|
(922,558
|
)
|
|
Net cash provided by financing activities
|
|
$
|
4,496,491
|
|
|
$
|
3,616,847
|
|
|
Net change in cash and cash equivalents
|
|
$
|
1,128,265
|
|
|
$
|
(194,291
|
)
|
As of June 30, 2020, we had $1,309,912 in cash and cash equivalents and a working capital deficit of $1,844,178. We are dependent on funds raised through equity financing. Our cumulative net loss of $16,001,124 was funded by equity financing. During the year ended June 30, 2020, we have raised gross proceeds of $1,717,478 in cash from borrowings from related parties and through government supported disaster relief programs.
During the year ended June 30, 2020, we used $2,808,559 in operating activities. During the year ended June 30, 2019, we used $2,888,580 from operating activities.
During the year ended June 30, 2020, we used $559,667 in investing activities, primarily related to the enhancements of our software compared to $922,558 of similar investing activities during the year ended June 30, 2019.
Net cash flow provided by financing activities for the years ended June 30, 2020 and 2019 was approximately $4,496,491 and $3,616,847, respectively.
Our increase in cash and cash equivalents for the year ended June 30, 2020 was primarily borrowings from related parties and through government supported disaster relief programs.
During the year ended June 30, 2020, our monthly cash requirements to fund our operating activities, was approximately $100,000, compared to approximately $150,000 during the year ended June 30, 2019. In the absence of the continued sale of our common and preferred stock or advances from related parties, our cash of $1,309,912 as of June 30, 2020 is insufficient to cover our current monthly burn rate for next twelve months.
The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. Management intends to finance operating costs over the next twelve months from the date of the issuance of these consolidated financial statements with existing cash on hand and/or the private placement of common stock. There is, however, no assurance that the Company will be able to raise any additional capital through any type of offering on terms acceptable to the Company, as existing cash on hand will be insufficient to finance operations over the next twelve months from the issuance of this annual report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
Our audited financial statements are affected by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of these policies is included in Note 2 of the notes to our audited financial statements. We have identified below the accounting policies that are of particular importance in the presentation of our financial position, results of operations and cash flows, and which require the application of significant judgment by our management.
The Company follows the guidance of the Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” which is effective as of the annual reporting period beginning after December 15, 2017 using either of two methods: (1) retrospective application of Topic 606 to each prior reporting period presented with the option to elect certain practical expedients as defined within Topic 606 or (2) retrospective application of Topic 606 with the cumulative effect of initially applying Topic 606 recognized at the date of initial application and providing certain additional disclosures as defined per Topic 606. We adopted Topic 606 pursuant to the method (2) and we determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at July 1, 2018.
For revenue recognition arrangements that we determine are within the scope of Topic ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we evaluate the goods or services promised within each contract related performance obligation and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
We recognize revenue upon completion of our performance obligations or expiration of the contractual time to use services such as bulk texting.
Recent Accounting Guidance Adopted
The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
Inflation
Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the year ended June 30, 2020.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 appears after the signature page of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no disagreements related to accounting principles or practices, financial statement disclosure, internal controls or auditing scope or procedure during the two fiscal years and interim periods.
Item 9A. Controls and Procedures
Management’s Report on Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that is designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
An evaluation was conducted under the supervision and with the participation of our management of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2020. Based on that evaluation, our management concluded that our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Such officer also confirmed that there was no change in our internal control over financial reporting during the fiscal year ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our management, with the participation of our principal executive officer and principal financial officer have conducted an assessment, including testing, using the criteria in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013). Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. This assessment included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of June 30, 2020. The ineffectiveness of the Company’s internal control over financial reporting was due to the following material weaknesses, which are indicative of many small companies with small staff:
|
(i)
|
inadequate segregation of duties consistent with control objectives; and
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|
|
|
|
(ii)
|
lack of multiple levels of supervision and review.
|
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of June 30, 2020, we determined that our disclosure controls and procedures are not effective as of such date to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time provided in the SEC rules and forms.
We believe that the weaknesses identified above have not had any material effect on our financial results. We are currently reviewing our disclosure controls and procedures related to these material weaknesses and expect to implement changes in the current fiscal year, including identifying specific areas within our governance, accounting and financial reporting processes to add adequate resources to potentially mitigate these material weaknesses.
Our management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management’s Remediation Plan
The weaknesses and their related risks are not uncommon in a company of our size because of the limitations in the size and number of staff. Due to our size and nature, segregation of all conflicting duties has not always been possible and may not be economically feasible.
However, we plan to take steps to enhance and improve the design of our internal control over financial reporting. During the period covered by this annual report on Form 10-K, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we plan to implement the following changes in the current fiscal year as resources allow:
(i) appoint additional qualified personnel to address inadequate segregation of duties and implement modifications to our financial controls to address such inadequacies.
We will attempt to implement the remediation efforts set out herein by the end of the 2021 fiscal year. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
Management believes that despite our material weaknesses set forth above, our financial statements for years ended June 30, 2020 and 2019 are fairly stated, in all material respects, in accordance with U.S. GAAP.
Item 9B. Other Information
None
Notes to Consolidated Financial Statements
Note 1 — Description of Business
Formation of the Company
On March 23, 2017, AP Event Inc. (“AP” or the “Registrant”) consummated an Agreement and Plan of Merger (the “Merger Agreement”) with LB Media Group, LLC, a Colorado limited liability Company (“LB Media”), August Petrov (the principal stockholder of AP), and LB Acquisition Corp., a Colorado corporation and a wholly-owned subsidiary of AP (“Acquisition”) whereby Acquisition was merged with and into LB Media (the “Merger”). (See Note 3)
As a result of the Merger, LB Media became a wholly-owned subsidiary of the Registrant, and immediately following the consummation of the Merger and giving effect to the securities sold in the Offering, the members of LB Media beneficially owned approximately fifty-five percent (55%) of the issued and outstanding Common Stock of the Registrant. The Merger Agreement contains customary representations, warranties, and covenants of the Registrant and LB Media for like transactions.
As a result of the reorganization and name change discussed later, Leafbuyer Technologies, Inc. (“Leafbuyer”) became the publicly quoted parent holding company with LB Media becoming a wholly owned subsidiary of Leafbuyer. Upon consummation of the Agreement, Leafbuyer common stock was deemed to be registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, pursuant to Rule 12g-3(a) promulgated thereunder. For purposes of Rule 12g-3(a), Leafbuyer is the successor issuer to AP.
AP was established under the corporation laws in the State of Nevada on October 16, 2014. On March 24, 2017, the Registrant changed its name to Leafbuyer Technologies, Inc.
All references herein to “us,” “we,” “our,” “Leafbuyer,” or the “Company” refer to Leafbuyer Technologies, Inc. and its subsidiary, LB Media.
Description of Business
We are focused on providing valuable information for the savvy cannabis consumer looking to make a purchase via deals and a dispensary database. We connect consumers with dispensaries by working alongside businesses to showcase their unique products and build a network of loyal patrons. Our national network of cannabis deals and information reaches millions of consumers monthly.
LB Media was founded in 2012 by a group of technology and industry veterans and provides online resources for cannabis deals and specials. Our headquarters is located in Greenwood Village, Colorado.
Basis of Presentation
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment charges may result.
Going Concern
As of June 30, 2020, we had $1,309,912 in cash and cash equivalents and a working capital deficit of $1,844,178. We are dependent on funds raised through equity financing. Our cumulative net loss of $16,001,124 was funded by equity financing and we reported a net loss of $5,509,248 for the year ended June 30, 2020. Accordingly, there is substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued.
Our ability to continue as a going concern is dependent upon our generating profitable operations in the future and / or obtaining the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they come due. Management believes that actions presently being taken to further implement our business plan of expansion of products, geographical locations we sell our services and deeper market penetration will generate additional revenues and eventually positive cash flow and provide opportunity for the Company to continue ,as a going concern. While we believe in the viability of our strategy to generate additional revenues and our ability to raise additional funds, there can be no assurances to that effect.
Note 2 —Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, LB Media. All significant inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
Management uses estimates and assumptions in preparing these consolidated financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Examples of estimates include loss contingencies; useful lives of our fixed assets and intangible assets; allowances for doubtful accounts; and stock-based compensation forfeiture rates. Examples of assumptions include: the elements comprising a software arrangement, including the distinction between upgrades or enhancements and new products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences of events that have been recognized in our financial statements or tax returns. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the financial statements as of and for the year ended June 30, 2019 to conform to the presentation as of and for the year ended June 30, 2020.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash includes demand deposits, time deposits, certificates of deposit, and short-term liquid investments with original maturities of three months or less when purchased. As of June 30, 2020 and 2019, the Company did not hold any cash equivalents. The Federal Deposit Insurance Corporation provides coverage for all accounts of up to $250,000. As of June 30, 2020, the Company had $1,050,000 in excess of federally insured limits.
Accounts Receivable, Net
Accounts receivable are stated at the amount management expects to collect. An allowance for doubtful accounts is recorded, as a charge to bad debt expense, where collection is considered to be doubtful due to credit issues. These allowances together reflect the Company’s estimate of potential losses inherent in accounts receivable balances, based on historical loss and known factors impacting its customers. The Company does not accrue interest on past due receivables.
Inventory
Inventory consists of merchandise and is stated at the lower of cost or net realizable value, determined by last-in, first-out method or market, with appropriate consideration given to obsolescence, excessive levels, deterioration and other factors. A reserve is recorded for any inventory deemed excessive or obsolete. No reserve is considered necessary at June 30, 2020 and 2019.
Internal Use Software
The Company capitalizes certain development costs related to upgrades and enhancements to its cloud commerce platform when it is probable the expenditures will result in additional functionality. Such development costs are capitalized when the preliminary project stage is completed and it is probable that the project will be completed and the software will be used to perform the function intended. These capitalized costs include external direct costs of services consumed in developing or obtaining internal-use software and personnel and related expenses for employees who are directly associated with and who devote time to internal-use software projects. Capitalization of these costs cease once the project is substantially complete and the software is ready for its intended purpose. Post configuration training and maintenance costs are expensed as incurred. Capitalized internal use software costs are recorded as part of fixed assets and intangible assets and amortized using a straight-line method, over the estimated useful life of the software, generally three to seven years, commencing when the software is ready for its intended use.
Impairment Assessment of Long-Lived Assets
The Company reviews identified intangible assets and long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. As of June 30, 2020 and 2019, there were no impairments of long-lived assets.
Convertible Debt and Securities
The Company follows beneficial conversion feature guidance in ASC 470-20, which applies to convertible stock as well as convertible debt. A beneficial conversion feature is defined as a nondetachable conversion feature that is in the money at the commitment date. The beneficial conversion feature guidance requires recognition of the conversion option's in-the-money portion, the intrinsic value of the option, in equity, with an offsetting reduction to the carrying amount of the instrument. The resulting discount is amortized as interest over the life of the instrument, if a stated maturity date exists, or to the earliest conversion date, if there is no stated maturity date. If the earliest conversion date is immediately upon issuance, the expense must be recognized at inception. When there is a subsequent change to the conversion ratio based on a future occurrence, the new conversion price may trigger the recognition of an additional beneficial conversion feature on occurrence.
Stock-Based Compensation
The Company accounts for stock-based awards to employees in accordance with applicable accounting principles, which requires compensation expense related to share-based transactions, including employee stock options, to be measured and recognized in the financial statements based on a determination of the fair value of the stock options. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For all employee stock options, we recognize expense over the requisite service period on an accelerated basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility and expected term. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
Options awarded to purchase shares of common stock issued to non-employees in exchange for services are accounted for as variable awards in accordance same principles as awards to employees. Such options are valued using the Black-Scholes option pricing model.
See Note 8 for the assumptions used to calculate the fair value of stock-based employee and non-employee compensation.
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which eliminates the separate accounting model for nonemployee share-based payment awards and generally requires companies to account for share-based payment transactions with nonemployees in the same way as share-based payment transactions with employees. The accounting remains different for attribution, which represents how the equity-based payment cost is recognized over the vesting period, and a contractual term election for valuing nonemployee equity share options. The standard is effective for interim and annual periods beginning after December 15, 2018. We adopted ASU 2018-07 on July 1, 2019 and the adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Loss per Share
Basic loss per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period. Diluted loss per share is computed similarly to basic loss per share, except that it includes the potential dilution that could occur if dilutive securities are exercised. Dilutive instruments had no effect on the calculation of earnings or loss per share during the years ended June 30, 2020 and 2019.
Leases
Effective on July 1, 2019, the Company adopted Accounting Standards Update No. 2016-02, Leases (“Topic 842”) using the modified retrospective method. This new accounting standard requires a lessee to recognize an asset and liability for most leases on its balance sheet. Upon adoption, right-of-use (ROU) assets and lease liabilities for operating leases were recorded in the amount of $301,885 and $308,843, respectively. Disclosure requirements for the reporting period beginning July 1, 2019 is presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under ASC 840, Leases (“Topic 840”).
The Company elected the practical expedient method permitted under the transition guidance, which allows a carryforward of historical lease classification, the assessment on whether a contract was or contains a lease, and the initial direct costs for any leases that existed prior to July 1, 2019. The Company also elected to recognize the associated lease payments in the consolidated statements of operations on a straight-line basis over the lease term.
Under Topic 842, the Company determines if an arrangement is a lease at inception. ROU assets and lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement and leases with an initial term of 12 months or less are not included in lease liabilities or ROU asset. As most leases do not provide an implicit rate, a rate which approximates the Company’s incremental borrowing rate is used, based on the information available at commencement date, in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. Lease agreements may contain variable costs such as common area maintenance, insurance, real estate taxes or other costs. Variable lease costs are expensed as incurred. Lease agreements generally do not contain residual value guarantees or restrictive covenants. Over the lease term, the Company uses the effective interest rate method to account for the lease liability as lease payments are made and the ROU asset is amortized in a manner that results in straight-line expense recognition.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC Topic 740, “Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year and (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence, it is more likely than not some portion or all of the deferred tax assets will not be realized. As of June 30, 2020, the Company had approximately $16,000,000 of net operating loss carry forward that was unrecognized tax benefits.
ASC Topic 740 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. There are no material uncertain tax positions at June 30, 2020, other than as disclosed in Note 6.
On December 22, 2017, the U.S. government enacted the Tax Act, which made significant changes to the Internal Revenue Code of 1986, as amended, including, but not limited to, reducing the U.S. corporate statutory tax rate and the net operating loss incurred after December 31, 2017 can be carried forward indefinitely and the two year net operating loss carried back was eliminated (prohibited).
Revenue Recognition
The Company adopted ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”) effective as of the annual reporting period beginning after December 15, 2017 we adopted the retrospective application of Topic 606 with the cumulative effect of initially applying Topic 606 recognized at the date of initial application and providing certain additional disclosures as defined per Topic 606. We determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at July 1, 2018.
For revenue recognition arrangements that we determine are within the scope of Topic ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. We only apply the five-step model to arrangements that meet the definition of a contract under Topic 606, including when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, we evaluate the goods or services promised within each contract related performance obligation and assess whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
We recognize revenue upon completion of our performance obligations or expiration of the contractual time to use services such as bulk texting.
Costs of Services
Costs of services primarily consists of the costs associated with the operation of the Company’s platform, such as third party fees paid for texting services, server and hosting charges, technology support costs, amortization, maintenance costs, staff costs and other expenses directly attributable to the online marketplace services.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures,” which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value, and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents, and debt are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The Company has no assets or liabilities valued at fair value on a recurring basis.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which introduces new guidance for the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The pronouncement will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The effect of the adoption of this pronouncement to the Company was immaterial.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820). ASU 2018-13 adds, modifies, and removes certain fair value measurement disclosure requirements. For private companies, ASU 2018-13 is effective for annual beginning after December 15, 2019. The Company is currently evaluating the effect of adopting this ASU on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s own Equity (Subtopic 815-40). ASU 2020-06 requires entities to provide expanded disclosures about the terms and features of convertible instruments and reduces the number of accounting models for convertible instruments and allows more contracts to qualify for equity classification. The pronouncement will be effective for public business entities that are SEC filers in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted but no earlier than fiscal years beginning December 15, 2020.
No other recent accounting pronouncements were issued by FASB and the SEC that are believed by management to have a material impact on the Company’s present or future condensed consolidated financial statements.
Note 3 — Fixed Assets and Intangible Assets
Fixed Assets and intangible assets consist of the following:
|
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
|
|
|
|
|
|
|
|
Software platform
|
|
$
|
4,482,225
|
|
|
$
|
3,922,558
|
|
|
Furniture and fixtures
|
|
|
1,500
|
|
|
|
1,500
|
|
|
Less accumulated amortization
|
|
|
(1,085,355
|
)
|
|
|
(389,884
|
)
|
|
Property and equipment, net
|
|
$
|
3,398,370
|
|
|
$
|
3,534,174
|
|
On November 6, 2018, the Company acquired a customer facing software (“Loyalty Software”) through a Stock Purchase Agreement, where the Company acquired all the issued and outstanding capital stock of Greenlight Technologies, Inc. (“GTI”) from its shareholders. At the time of the transaction, there were no employees working for GTI, no systems and no assets, other than the Loyalty Software. GTI’s legal entity will be dissolved in the transition and the Loyalty Software will be assumed by the Company. Management determined that the purchase of GTI did not constitute a business purchase and recorded the transaction as a purchase of software. The consideration for the Loyalty Software was 2,916,667 shares of common stock, par value $0.001 per share and cash of approximately $450,000. Total value of the Loyalty Software was estimated at approximately $3,010,000. The additional consideration for future developments will be evaluated and considered enhancements which will either be capitalized to the software or expensed as research and development costs. During the year ended June 30, 2020 additional Incentive Shares of 366,667 for a value of $262,500 was issued to shareholders of GTI as final settlement of the 2018 agreement. During the year ended June 30, 2020 and June 30, 2019 the Company capitalized $559,667and $922,558, respectively of software enhancements.
GTI provides cannabis consumers real-time mobile ordering and loyalty rewards through an internally developed application that integrates with the local dispensary’s point of sale system. The Company plans to fully integrate this technology into the current platform and create an “Ultimate Bundle” of services for the cannabis industry. The current revenues of GTI are minimal, and the Company expects higher sales in the California market as the system is fully integrated.
Amortization expense, recorded as cost of revenue, related to internal use software totaled $695,103 during the year ended June 30, 2020 and for the same period ended 2019 amortization expenses was $388,752. Amortization expense for the next five years is as follows:
|
2021
|
|
$
|
724,445
|
|
|
2022
|
|
|
724,445
|
|
|
2023
|
|
|
724,445
|
|
|
2024
|
|
|
622,359
|
|
|
Thereafter
|
|
|
602,676
|
|
|
Total Unamortized Expense
|
|
$
|
3,398,370
|
|
Note 4— Capital Stock and Equity Transactions
The Company has 150,000,000 shares of common stock authorized with a par value of $0.001 per share as of June 30, 2020. In addition, the Company has 10,000,000 preferred stock authorized with a par value of $0.001 per share as of June 30, 2020.
On April 19, 2018, the Company entered into a Standby Equity Distribution Agreement (the “SEDA”) with YA II PN Ltd. (“Investor”), a Cayman Island exempt limited partnership and an affiliate of Yorkville Advisors Global, LLC, whereby the Company sold and the Investor purchased 869,565 shares (the “Initial Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”) for the purchase price of One Million Dollars ($1,000,000), Additionally, under the SEDA the Company may sell to the Investor up to $5 million of shares of Common Stock over a two-year commitment period. Under the terms of the SEDA, the Company may from time to time, in its discretion, sell newly issued shares of its common stock to the Investor at a discount to market of 8% of the lowest daily volume weighted average price during the relevant pricing period. The Company is obligated to register the Initial Shares, the Commitment Shares (as defined below), and the shares of Common Stock issuable under the SEDA pursuant to a registration statement under the Securities Act of 1933, as amended (the “Securities Act”).
The Company is not obligated to utilize any portion of the SEDA and there are no minimum commitments or minimum use penalties provided the Company does not terminate the SEDA by October 2020 wherein the Company would be required to pay a termination fee of $100,000. The Company issued One Hundred Thousand (100,000) shares of Common Stock as a commitment fee (the “Commitment Shares”) to an affiliate of the Investor. The total amount of funds that ultimately can be raised under the SEDA over the two-year term will depend on the market price for the Company’s common stock and the number of shares actually sold.
The SEDA does not impose any restrictions on the Company’s operating activities. During the term of the SEDA, the Investor is prohibited from engaging in any short selling or hedging transactions related to the Common Stock.
In connection with the SEDA, the Company engaged Garden State Securities, Inc. (“GSS”) as its exclusive selling/placement agent. In connection with the transactions set forth in the SEDA, GSS shall receive a fee equal to 10% of the purchase price of the Initial Shares in cash plus warrants to purchase 86,957 shares of Common Stock at an exercise price of $1.15 per share, expiring in five years. GSS will also receive a cash fee equal to 5% of the amount paid by the Investor for each Advance under the SEDA.
During October and November 2018, the Company used the SEDA to receive $1,045,000. The Company issued 1,116,738 common shares which were valued at fair market at the date issued.
On July 2, 2019, the Company, entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”), pursuant to which the Company agreed to issue and sell directly to the Investors in a private offering (the “Offering”), an aggregate of 7,211,538 shares of common stock (the “Shares”), par value $0.001 per share, at $0.624 per Share or a 20% discount to the closing price as of July 2, 2019, for gross proceeds of approximately $4,500,000 before deducting offering expenses. The Purchase Agreement contained customary representations and warranties. The Shares were offered by the Company pursuant to the exemption provided in Section 4(a)(2) under the Securities Act, and Rule 506(b) promulgated thereunder. The Company was obligated in accordance with the terms of a Registration Rights Agreement (the “Rights Agreement”) to register the Shares and the shares of common stock underlying the warrants described below, within 90 days from the date of the Purchase Agreement. All shares of common stock and shares of common stock underlying the warrants have been registered.
As additional consideration for the purchase of the Shares, the Company agreed to issue to the Investors Series A Warrants, Series B Warrants, and Series C Warrants (collectively, the “Warrants”). The number of shares for the Warrants and exercise price of the Warrants is subject to adjustment; provided, however, on each of (i) the 3rd Trading Day following the effective date (the “Effective Date”) of the Registration Statement to be filed by the Company (the “Interim True-Up Date”), and (ii) the 6th Trading Day following the Effective Date (the “Final True-Up Date”), the Exercise Price shall be reduced, and only reduced, to equal the lower of (1) the then Exercise Price and (2) 100% of the lowest VWAP during the 2 Trading Days prior to the Interim True-Up Date or 5 Trading Days prior to the Final True-Up Date, as applicable, immediately following the Effective Date. The Series C Warrants, which are considered pre-funded, allow each Investor to purchase an amount of shares equal to the sum of (a) any shares purchased by the Investor pursuant to the Purchase Agreement that would have resulted in the beneficial ownership of greater than 4.99% of the outstanding common shares of the Company, (b) on the 3rd Trading Day following the Effective Date, if 80% of the lowest VWAP during the 2 Trading Days immediately prior to such date (“Primary Effective Date Price”) is less than $0.624, then a number of shares of Common Stock equal to such Investor’s Purchase Agreement purchase amount divided by the Primary Effective Date Price less any shares of Common Stock (i) issued at the Closing and (ii) issuable pursuant to clause (a) above, if any, and (c) on the 6th Trading Day following the Effective Date, if 80% of the lowest VWAP during the 5 Trading Days immediately prior to such date (“Secondary Effective Date Price”) is less than $0.624, then a number of shares of Common Stock equal to such Holder’s Subscription Amount at the Closing divided by the Secondary Effective Date Price less any shares of common stock (i) issued at the Closing, (ii) issuable pursuant to clause (a) above, if any, (ii) issuable pursuant to clause (b) above, if any. The Series C Warrants are exercisable at a price of $0.001 per share.
In connection with the Purchase Agreement, the Company engaged Dawson James as its exclusive selling/placement agent. In connection with the transactions set forth in the Purchase Agreement, Dawson James received a fee equal to 10% of the Offering in cash plus warrants to purchase 360,577 shares of Common Stock at an exercise price of $0.78 per share, expiring in five years.
The Company issued 30,299,998 shares of common stock pursuant to the Purchase Agreement, as well as the exercise of the Series C Warrants and fees paid in shares of common stock. The Company received approximately $4,038,000, net of the placement fees, legal and other expenses incurred for the placement of the Shares. The Investors received Series A Warrants to allow the Investors to purchase an aggregate of 7,018,090 shares of common stock, and Series B Warrants to allow the Investors to purchase an aggregate of 28,072,364 shares of common stock at a purchase price of $0.1603 per common share. If the investors choose to exercise all Series A and Series B Warrants, the Company would receive proceeds of $5,625,000.
The Series A Preferred Shares of 3,000,000 units are convertible into the greater of one share of Common Stock or a number of shares of Common Stock so that the Series A holders would hold 55% of the number of outstanding shares of Common Stock. The Series A Shares vote on an “as-converted” basis. The Series B Convertible Preferred Stock of 1,120,000 units are convertible into 1,120,000 common shares.
Issuance of Common Stock
During the year ended June 30, 2020 the Company issued 860,950 shares of Common Stock to employees. These shares were valued at fair market value of $103,614 and expensed in the accompanying Consolidated Statement of Operations.
During the year ended June 30, 2020, the Company issued 1,815,220 shares of Common Stock to Note Payable Holders are satisfaction of these obligations. These shares were valued at fair market value of $131,000.
During the year ended June 30, 2020, the Company issued 366,667 shares of Common Stock to shareholders of GTI as additional consideration for the 2019 software acquisition. These shares were valued at fair market value of $262,500.
During the year ended June 30, 2020, the Company accepted subscriptions for the issuance of 30,299,998 shares of Common Stock for total subscriptions of $4,037,888 in cash, as described above.
During the year ended June 30, 2020, the Company issued 500,000 shares of Common Stock to vendors for services rendered. These shares were valued at fair market value of $40,000 and expensed in the accompanying Consolidated Statement of Operations.
During the year ended June 30, 2020, the Company issued a total of 15,000 shares of Common Stock to two members of the Board of Directors for services rendered. These shares were valued at fair market value of $1,230 and expensed in the accompanying Consolidated Statements of Operations.
During the year ended June 30, 2019, the Company issued 367,387 shares of Common Stock to employees and consultants related to the exercise of stock options. The Company received $91,847 for the issuance of these shares.
During the year ended June 30, 2019, the Company accepted subscriptions for the issuance of 1,116,738 shares of Common Stock for total subscriptions of $1,045,000 in cash.
During the year ended June 30, 2019, the Company issued 62,000 shares of Common Stock to vendors for services rendered. These shares were valued at fair market value of $40,560 and expensed in the accompanying Consolidated Statements of Operations.
During the year ended June 30, 2019, the Company issued a total of 10,000 shares of Common Stock to two members of the Board of Directors for services rendered. These shares were valued at fair market value of $8,130 and expensed in the accompanying Consolidated Statements of Operations.
Note 5 — Debt
During February 2018, the Company issued a promissory note in favor of an investor of the Company in the amount of $150,000 in exchange for $132,000 cash. The note has an original issue discount of $18,000 that is being amortized to interest expense over the term of the note. The loan maturity date was extended to August 8, 2019, the discount is fully amortized and total unpaid principal and interest is approximately $193,052, accruing at 12% at June 30, 2020, and is payable upon demand.
On September 21, 2018, the Company entered into a promissory note with an investor of the Company with a face value of $440,000 in exchange for $400,000 cash payment (“the Convertible Note”), the discount of the Convertible Note will be amortized over the life of the Convertible Note and have an interest rate of 10%. The Convertible Note has a twelve-month term with no payment required for the initial six months; after six months, the Company will repay the investors interest and principal in six equal installments. The principal and interest of the note is convertible into the Company’s common stock at a purchase price of $0.70 per common share after the six months. If the Company defaults on the Convertible Note, the interest is increased to 12% and at the investors’ option, the principal and interest can be converted into the Company’s common stock at a 20% discount to the then current market. In addition, the Company issued five-year warrants to purchase up to 200,000 common shares of the Company’s common stock at a price of $0.75 per share. On April 15, 2019, the investor has agreed to extend the Convertible Note for six months to September 2019 and as of June 30, 2020, the Convertible Note is payable upon demand.
On September 21, 2018, the Company entered several promissory notes with various investors of the Company with a face value of $440,000 in exchange for $400,000 cash payment (“the Notes”), the discount of the Notes will be amortized over the life of the Note and have an interest rate of 10%. The Notes have a twelve-month term with no payment required for the initial six months; after six months, the Company will repay the investors interest and principal in six equal installments. The principal and interest of the note is convertible into the Company’s common stock at a purchase price of $0.70 per common share after the six months. If the Company defaults on the Notes, the interest is increased to 12% and at the investors’ option, the principal and interest can be converted into the Company’s common stock at a 20% discount to the then current market price. In addition, the Company issued five-year warrants to purchase up to 200,000 of the Company’s common shares at a price of $0.75 per share. The cash for these Notes was received prior to September 30, 2018. As of June 30, 2020, $220,000 of the Notes have been fully extinguished and the remaining $220,000 is in default and payable upon demand.
During the year ended June 30, 2019, the Company entered into several promissory notes with various investors of the Company with a face value of $960,000 in exchange for a total of $900,000 cash payments (“the Notes”). The Notes have a beneficial conversion feature valued at $839,378, which is recorded as a discount. The total discount on the Notes will be amortized over the life of the Notes and recorded as interest expense. The notes have an interest rate of 7% and have an eighteen-month term with no payment required for the initial six months; after six months, the Company will repay the investors interest and principal in twelve equal installments. The principal and interest of the note is convertible into the Company’s common stock at a purchase price of $0.75 per common share at any time after the Original Issue Date. In March 2020, the Company did not make its required principal and interest payment which put the Notes in default. The interest rate increased to 15% and at the investors’ option, the principal and interest can be converted into the Company common stock at a 20% discount to the then current market price which resulted in the issuance of common stock valued at $131,000 and the repricing of the beneficial conversion feature impacting additional paid in capital by $134,584. As of June 30, 2020, $533,000 of the Notes have been fully extinguished as $402,000 of debt repayment and the issuance of common stock valued at $131,000. The remaining principal of $390,125 is due on August 2020. The unamortized discounts to the note as of June 30, 2020 are $43,727.
During the year ended June 30, 2020, the Company entered into a promissory note with a related party (see Note 8) with a face value of $600,000 in exchange for a total of $565,000 cash payments. The total discount of the Note will be amortized over the life of the Note and recorded as interest expense. The note has an interest rate of 8% and matures on December 1, 2020.
During the year ended June 30, 2020, the Company entered into a promissory note with a related party (see Note 8) with a face value of $50,000. The note has an interest rate of 8% and matures on January 1, 2021.
On April 30, 2020 the Company executed the standard loan documents required for securing a loan (the “EIDL Loan”) from the United States Small Business Administration (the “SBA”) under its Economic Injury Disaster Loan (“EIDL”) assistance program in light of the impact of the COVID-19 pandemic on the Company’s business. The principal amount of the EIDL Loan is $500,000, with proceeds to be used for working capital purposes. Interest on the EIDL Loan accrues at the rate of 3.75% per annum and installment payments, including principal and interest, are due monthly beginning twelve months from the date of the EIDL Loan in the amount of $2,437 The balance of principal and interest is payable thirty years from the date of the promissory note.
On May 29, 2020, the Company was granted a loan from American Express National Bank in the aggregate amount of $602,478, pursuant to the Paycheck Protection Program (“PPP) under Division A, Title I of the CARES Act, which was enacted March 27, 2020. The Loan which was in the form of a Note dated May 29, 2020, matures on May 29, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing on December 29, 2020. The Note may be prepaid by the Borrower at any time prior to maturity with no prepayment penalties. Funds from the Loan may only be used for payroll costs, costs used to continue group health care benefits, rent, utilities and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, it cannot be assured that the Company will be ineligible for forgiveness of the loan, in whole or in part.
The Company recognized $981,423 and $479,678 of interest expense for the years ended June 30, 2020 and 2019, respectively. As of June 30, 2020 and 2019, accrued interest on the above notes was $186,360 and $118,193, respectively. The weighted average interest rates as of June 30, 2020 and 2019 was 5.65% and 6.80%.
Notes payable and long-term debt outstanding as of June 30, 2020 and 2019 are summarized below:
|
|
|
Maturity Date
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
|
12% $150,000 Convertible Note Payable, net of unamortized discount of $0 and $14,320, respectively
|
|
Due on Demand
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
|
10% $440,000 Convertible Note Payable, net of unamortized discount of $0 and $28,589, respectively
|
|
Due on Demand
|
|
|
440,000
|
|
|
|
411,411
|
|
|
10% $220,000 Convertible Note Payable, net of unamortized discount of $0 and $14,295, respectively
|
|
Due on Demand
|
|
|
—
|
|
|
|
205,705
|
|
|
10% $220,000 Convertible Note Payable, net of unamortized discount of $0 and $14,295, respectively
|
|
Due on Demand
|
|
|
220,000
|
|
|
|
205,705
|
|
|
7% $426,667 Convertible Note Payable, net of unamortized discount of $35,866 and $314,40, respectively
|
|
August 15, 2020
|
|
|
182,326
|
|
|
|
112,266
|
|
|
7% $106,667 Convertible Note Payable, net of unamortized discount of $78,601
|
|
August 15, 2020
|
|
|
—
|
|
|
|
28,066
|
|
|
7% $213,333 Convertible Note Payable, net of unamortized discount of $0 and $153,786, respectively
|
|
September 20, 2020
|
|
|
—
|
|
|
|
59,547
|
|
|
7% $213,333 Convertible Note Payable, net of unamortized discount of $28,492 and $153,786, respectively
|
|
September 20, 2020
|
|
|
164,072
|
|
|
|
59,547
|
|
|
5% Note Payable
|
|
Due on Demand
|
|
|
—
|
|
|
|
600,000
|
|
|
8% $600,000 Related party Note Payable, net of unamortized discount of $21,911
|
|
December 1, 2020
|
|
|
578,089
|
|
|
|
—
|
|
|
8% $50,000 Related Party Note Payable
|
|
January 1, 2021
|
|
|
50,000
|
|
|
|
—
|
|
|
5% Note Payable
|
|
Due on Demand
|
(1)
|
|
350,000
|
|
|
|
350,000
|
|
|
1% PPP Note Payable
|
|
May 29, 2022
|
|
|
602,478
|
|
|
|
—
|
|
|
3.75% SBA EIDL Note Payable
|
|
April 30, 2050
|
|
|
500,000
|
|
|
|
—
|
|
|
Total notes payable
|
|
|
|
|
3,236,965
|
|
|
|
2,182,247
|
|
|
Less current portion of notes payable
|
|
|
|
|
2,134,487
|
|
|
|
2,182,247
|
|
|
Notes payable, less current portion
|
|
|
|
$
|
1,102,478
|
|
|
$
|
—
|
|
__________
(1) The Company entered two promissory notes with an investor of the Company in the amount of $350,000. The investor had agreed to convert the loan into 437,500 shares of common stock in 2018. The Company has not issued these shares to the investor and booked the notes as a short-term loan. This loan is considered payable upon demand.
Note 6 —Commitments and Contingencies
The Company records tax contingencies when the exposure item becomes probable and reasonably estimable. As of June 30, 2020, the Company had a tax contingency related to stock options granted below the fair market value on date of grant. The Company is in the process of determining the possible exposure and necessary expense accrual for the related tax, penalties and interest. Management has not been able to determine the amount as of the date of this report, however, does not expect the amount to be material to the financial statements.
To the best of the Company’s knowledge and belief, no legal proceedings of merit are currently pending or threatened against the Company.
Note 7 —Risks and Uncertainties
The Company does not have a concentration of revenues from any individual customer (less than 10%).
The Company operates in a rapidly evolving and highly regulated industry and will only conduct business in legal cannabis markets.
The Company was affected in March by the COVID-19 outbreak and worldwide pandemic. The Company saw some postponements in orders in the first few weeks March 2020 but by the end of March 2020 orders stabilized to a normal level. The Company has made a significant pivot to have the complete solution when it comes to online ordering and communication.
Note 8 — Stock Based Compensation and Payments
The equity incentive plan of the Company was established in February of 2017. The Board of Directors of the Company may from time to time, in its discretion grant to directors, officers, consultants and employees of the Company, non-transferable options to purchase common shares, provided that the number of options issued do not exceed 20,000,000. The options are exercisable for a period of up to 10 years from the date of the grant. The number of shares authorized to be issued under the equity incentive plan was increased from 10,000,000 to 20,000,000 through consent of stockholders to amend and restate the equity incentive plan.
The following table reflects the continuity of stock options for the years ended June 30, 2020:
A summary of stock option activity is as follows:
|
|
|
June 30,
2020
|
|
|
|
|
|
|
|
Number of options outstanding:
|
|
|
|
|
Beginning of year
|
|
|
4,598,823
|
|
|
Granted
|
|
|
13,593,375
|
|
|
Exercised, converted
|
|
|
-
|
|
|
Forfeited / exchanged / modification
|
|
|
(5,633,823
|
)
|
|
|
|
|
|
|
|
End of period
|
|
|
12,558,375
|
|
|
|
|
|
|
|
|
Number of options vested at end of period
|
|
|
1,428,197
|
|
|
Number of options available for grant at end of period
|
|
|
5,257,288
|
|
|
|
|
|
|
|
|
Weighted average option prices per share:
|
|
|
|
|
|
Granted during the period
|
|
$
|
0.07
|
|
|
Exercised during the period
|
|
$
|
0.00
|
|
|
Terminated during the period
|
|
$
|
0.45
|
|
|
Outstanding at end of period
|
|
$
|
0.07
|
|
|
Exercisable at end of period
|
|
$
|
0.07
|
|
The average fair value of stock options granted was estimated to be $0.07 per share for the period ended June 30, 2020. This estimate was made using the Black-Scholes option pricing model and the following weighted average assumptions:
|
|
|
2020
|
|
|
|
|
|
|
|
Expected option life (years)
|
|
2 - 4
|
|
|
Expected stock price volatility
|
|
227 to 230
|
%
|
|
Expected dividend yield
|
|
|
—
|
|
|
Risk-free interest rate
|
|
0.44 to 0.54
|
%
|
Stock-based compensation expense attributable to stock options was approximately $714,638 for the year ended June 30, 2020. As of June 30, 2020, there was approximately $783,222 of unrecognized compensation expense related to 12,552,375 unvested stock options outstanding, and the weighted average vesting period for those options was 3 years.
Warrants
At June 30, 2020, the Company had outstanding warrants to purchase the Company’s common stock which were issued in connection with multiple financing arrangements. Information relating to these warrants is summarized as follows:
|
Warrants
|
|
Remaining
Number
Outstanding
|
|
|
Weighted
Average
Remaining Life (Years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Warrants- SEDA Financing
|
|
|
86,957
|
|
|
|
2.80
|
|
|
$
|
1.15
|
|
|
Warrants-Issued with Convertible Notes
|
|
|
600,000
|
|
|
|
3.23
|
|
|
$
|
0.75
|
|
|
Warrants – Securities Purchase Agreement
|
|
|
360,577
|
|
|
|
4.02
|
|
|
$
|
0.78
|
|
|
Warrants A – Securities Purchase Agreement
|
|
|
7,018,090
|
|
|
|
.02
|
|
|
$
|
0.16
|
|
|
Warrants B – Securities Purchase Agreement
|
|
|
28,072,364
|
|
|
|
4.02
|
|
|
$
|
0.16
|
|
|
Total
|
|
|
36,137,988
|
|
|
|
|
|
|
|
|
|
Note 9 — Related Party Transactions
In March 2020, the Company entered into a promissory note with the Chief Executive Officer for $600,000 in exchange for a total of $565,000 cash payments. The note has an interest rate of 8% and matures on December 1, 2020.
In March 2020, the Company entered into a promissory note with the Chief Technology Officer for $50,000. The note has an interest rate of 8% and matures on January 1, 2021.
Note 10 — Leases
The following is a summary of future minimum lease payments and related liabilities for all non-cancelable operating leases maturing as of June 30:
|
|
|
Operating
Leases
|
|
|
2021
|
|
$
|
125,419
|
|
|
2022
|
|
|
70,843
|
|
|
Thereafter
|
|
|
-
|
|
|
Total minimum lease payments including interest
|
|
|
196,262
|
|
|
Less: Amounts representing interest
|
|
|
(28,064
|
)
|
|
Present value of minimum lease payments
|
|
|
168,198
|
|
|
Less: Current portion of lease liabilities
|
|
|
(103,049
|
)
|
|
Non-current portion of lease liabilities
|
|
$
|
65,149
|
|
|
|
|
|
|
|
|
Cash payments on lease liabilities
|
|
$
|
146,692
|
|
|
Weighted average remaining lease term
|
|
1 year
|
|
|
Weighted average discount rate
|
|
|
10
|
%
|
Note 11 — Subsequent Events
Certain Promissory Notes outstanding as of June 30, 2020 matured in August and September of 2020 and the Company expects the Notes and accrued interest to be converted into Common Stock.
The Company has evaluated subsequent events through September 25, 2020 and has not identified any other items requiring additional disclosure.